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Agree with the Liquid Fund. What about the ultra short duration debt funds. Will it not be a preferred choice over Banking & PSU Debt Funds and Gilt funds?

Beyond liquid funds, AA rated bonds start making appearance in your portfolio. For eg, Ultra short term debt funds have 12% exposure to AA bonds. Returns maybe slightly higher, but it exposes portfolio to some default risk. But Banking & PSU Debt Funds again will have close to zero exposure to AA rated bonds. Gilt funds are of course SOV rated (sovereign).

However, Banking PSU and Gilt funds are suitable only for those who completely understand debt mutual funds. In the short term, they both are affected by rise and fall of interest rates. Over 10 to 20 year period, banking PSU funds have offered 8% pa while Gilt funds have offered 9% pa. However, the returns were higher than FDs only because there was a continuous downtrend in the interest rate (see screenshot in the previous post). If anybody fears further fall in interest rates, these funds will generate higher than FD returns. Conversely, if interest rates rise continuously over the next 5 or 10 years, then they will underperform compared to FD/liquid funds.

If anybody wants seedhi baath no bakwaas type simplicity, liquid funds are best for both short term or for 20+ years holding period. These are the long term historical returns per annum for liquid funds -> 7% pa over 20 years. At that time, there were no 'direct' funds either. So these are 'regular fund' returns after commissions siphoned off by brokers:

There is not a 1:1 correlation between a debt instrument's credit rating and default risk. It's more nuanced than that, and each instrument (NCD, MLD, etc.) that you are investing in needs to be reviewed carefully before the investment.

Otherwise, you may be overcautious and let go of lucrative gains unnecessarily. An example: APCRDA is an authority that was explicitly set up to create the new capital of Andhra Pradesh, namely Amravati. Their bonds, issued in 2018, came with various maturities and carried an A rating. They are also unsecured but carried a reasonably good coupon of 10.32%. In 2023 CRISIL downgraded them from A- to BBB+ as they missed a coupon payment. Due to several political issues (long story, summary here: https://www.ndtvprofit.com/economy-f...he-last-minute) the bonds first nearly went into default and then avoided it. Those who picked up the bonds in secondary will now enjoy returns of 14.57% till as late as 2028. So in the case it was the backer (AP govt and eventually GoI) that prevented principal erosion for bondholders

The reverse is also true: Case in point of Goswami Infratech, a subsidiary of the Shapoorji Pallonji group. Back in 2023, GS had come up with a bond with the potential yield hitting as high as 18.75%. Foreign investors lined up for this massive 14300 crore private placement despite the rating of the instrument (BB) thanks to the backer's brand name. Fast forward to today, SP group has urged bondholders to allow deferment of payment till Dec 31 so the Afcons Infra IPO is not affected (which makes me think how much of those proceeds will go to debt servicing). https://economictimes.indiatimes.com...8.cms?from=mdr.

So as long as you retain the basics of debt in your heart- that you are lending to a business, and you are convinced that this business will pay you back, you should be good.

Hi,

Have benefitted a lot from this open forum for my driving passion. Cheers to all the contributors

Now on this thread, i can contribute a lot.

I am a Fund manager - Debt Funds. Happy to help with any queries.

I have read the responses to my message and thanks to everyone for sharing your insights/knowledge on this topic.
Let me add few more details to whatever I have already mentioned in my earlier message.

• I keep my FDs in either my parents or spouse’s name and hence I have not paid any tax on the interest earned on these FDs as my parents & spouse does not have any other source of income.
• I never used FDs for emergency situations and hence I always keep them for 3 years period. The institution where I keep these FDs offer maximum interest for 36 months period.
• For last 3 years, the RoI has varied from 7.5-8.25% (considering 0.5% extra for senior citizens). And this is compounded quarterly.
• When I compare the 'Yield to Maturity' from last 3 years of some of the top earning liquid funds, I see it is around 7%.

So, my question remains the same. Considering my requirements and the information I have shared here does it make sense for me to switch to Liquid Funds/Debt Funds now?
Please note that, I am very much conservative investor, still a newbie when it comes to stocks/mutual funds and hence please educate me wherever my understanding/thinking is wrong.

Tax efficiency has no bearing in your case, since the returns are tax free.
Safety wise, as long as you keep <5L in a bank (reputed banks), this is practically risk free money.
Yes, in the unlikely event a bank goes under, your cashflow may be affected (if you are taking periodic payments). But the deposit amount can be spread across a few banks to reduce the risk.

I suppose you have to ask yourself, why do you want to change the investment approach?

Some misunderstand as to tax. If you put FD in your spouses name and she has not other source of income, her income in the form of interest needs to be clubbed with your income. Search clubbing of income tax
This does not apply to parents since you can consider that as a gift to them. While this might not be caught, it is still tax evasion and can come up during random scrutiny

As to the second part, it is a good idea not to invest in anything you dont understand. Debt funds can be quite complex and you need to select something aligned to your goals and time frames and risk profile.

The best thing to do is to consult a SEBI registered fee only planner who can help you plan finances without any conflict of interest. While the fees may seem excessive it will more than pay back in terms of quality of sleep:)


https://www.feeonlyindia.com/

I was looking at HDFC Long Duration Fund and on Value Research got the following



A one year return of 13.86%? 50% more returns than an FD?

Surely interest movements were not that much in the last one year. Also this fund invests 98.69% in GOI sov.

What am I missing?

When you type 'NIFTY GS 10YR' in Google, you can find the returns of 10 year GOI Bonds. They have returned 10.4% last year:



Now HDFC Long Duration Debt fund is doing an ultra pro max on GOI bonds. It has invested in 30 year maturity GOI bonds, instead of typical 10 year bonds we see in other debt funds.:



Such 30 year dated bonds will have higher interest rate risk and returns.

Now, in the last one year, RBI has not reduced rates. However, bond prices can sometimes look into the future. If the markets anticipate a large rate cut, bond prices can reflect it now. It is just like in equities - if a company is expected to see large profits in the future, it might reflect on its stock price now.

Thanks @SmartCat for clarity.

This begs the question.

Like in an equity we track quarterly earnings, what do we track here for an appropriate entry into and exit out of the fund if at all there is such a metric.

In bonds you get paid for taking duration risk apart from the carry based on yield.

For example of a bond yields 7.5% and the yield falls to 7% over a Yr and the bond had a duration of 10yrs ( note that this is different from the term) then your total return will be the yield of 7.5% + the capital gain due to the rise in the price of bond which is 0.5% × 10yrs = 5% and hence a total return of 12.5%

Conversely if the yields rose 50 bps then the return would have only been 2.5%.

Hence when evaluating debt funds, particularly over short term periods, you need go understand whether you are OK with taking the duration risk. Over long periods ( say 10 yrs) however it is quite rare for yields to keep on rising and hence the duration risk doesn't matter as much.

It is best to leave entry/exit to the fund manager. Perhaps one thing you can do is look at yield to maturity %. If it is significantly higher than FD rates, it could mean the fund is holding undervalued bonds. However, look at yield to maturity % in conjunction with average maturity in years and also credit quality.

Another option is to invest in debt MFs that give the fund manager lots of flexibility. If the fund manager expects the interest rates to fall, he will buy longer dated bonds. If he expects the interest rates to rise, he will buy short term/money market securities.

You can look up funds under 'Dynamic Bonds'
https://www.valueresearchonline.com/...-dynamic-bond/

or

'Gilt Funds' (they typically invest upto 50% of assets in treasury bills)
https://www.valueresearchonline.com/...134/debt-gilt/

Note: If you want higher interest rate risk/return exposure in gilt funds, you have to select funds under "Gilt with 10 year constant duration" category
https://www.valueresearchonline.com/...tant-duration/

Tax loophole which might get closed soon.

Source: Livemint. (I received the image on Whatsapp, so don't have a link).

I saw this on X as well.
But cant we just invest directly to Tier 1 (as voluntary - employee contribution) and get the same "benefit". Or am I missing something? Once the fund moves to Tier 1, it is also locked in until retirement age.

You can anyway invest in Tier-1 directly say at age of 57/58/59, get applicable tax benefits and withdraw at 60. If your total value of NPS investments is less than 5L, you can even withdraw it fully.